Resetting home equity lines of credit to the tune of $150 billion over the next 48 months, combined with a near-certain increase in short term interest rates over that same period, could very well be a bad situation for institutions who hold these assets.
Simply creating a preemptive solution, or series of solutions, for borrowers facing hardship is not enough. While it's important to know that borrowers fully understand the reset risk they face as well as the options available to them; it's critical that those consumers actually follow through to reduce their risk — and yours.
In a perfect world, the consumer who is facing a significant increase in their monthly HELOC payment would not only be aware of the coming increase, but would be mindful of all available options before moving quickly toward a solution that benefits all parties.
However, this does not tend to be the case. It is entirely reasonable to assume, for example, that a borrower who has made timely payments over a 10-year period, simply may not know, or realize, that their monthly HELOC payment might soon double or triple, until it's too late. Automated phone calls, website pop-ups, email blasts and generic marketing flyers all continue to be the marketing tools of choice for the lending industry. As a result, consumers are much more likely to tune out than they are to pay attention to a simple notification from their bank - especially if the borrower happens to be current on their payments.
Underwater HELOCs that are more than 60 days delinquent have a greater than 75% chance of eventually defaulting and losing nearly 100% of their value. With this in mind, it's not surprising to see that regulators are keeping an extremely close eye both on these assets as well as the institutions who own them.
Consumer outreach methodologies and paths can vary dramatically depending on multiple risk factors. For example, the outreach message and methodology for a lower-risk borrower (780 FICO score), with a medium-risk loan (80% combined loan-to-value), facing severe payment shock (300%) may be entirely different than that of a high-risk, underwater borrower facing only moderate payment shock.
Offering a streamlined refinance opportunity to one group, while offering an "extension of terms" to another might be the best course of action.
While each of those paths have their own sets of challenges, it's important to note that unless a borrower responds to a very specific call to action and accepts your proposal, your risk will likely remain unchanged.
Precisely how and when the borrower is contacted is also critical. The timing of outreach (months prior to reset), sequencing (number of days between contact), frequency of contact and the nature of the engagement (letter, email, call) are arguably just as important as the message itself.
Reach out too soon, and the borrower might ignore the effort. Use the wrong introduction and the notification might simply be overlooked. Bullet points, underlines, bold type, pictures, hyperlinks, graphs, Web pages and even envelope sizes, are all important parts of complex maze designed to reduce risk by quickly educating your consumer.
Identifying risk and crafting a solution is going the extra mile. Don't fall short by assuming a borrower will follow through on the plan without guidance.
One need only to explore the number of loans eligible for the Home Affordable Refinance Program that have yet to refinance to understand that the consumer doesn't always do that which is in their best interest.
After years of designing and launching numerous consumer education and awareness campaigns for many government and private sector firms, one thing has become clear: a careful blend of multiple outreach methodologies with the strategic design of a clear and concise marketing message is the key to a successful campaign with high conversion rates.
Frank T. Pallotta is the owner, and Erica C. Abendschoen is an associate,
with Steel Curtain Capital Group LLC, a mortgage advisory firm.